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Introduction to the New VAT on Property System Ronan O’Grady BBLS (European), AITI)

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Presentation on theme: "Introduction to the New VAT on Property System Ronan O’Grady BBLS (European), AITI)"— Presentation transcript:

1 Introduction to the New VAT on Property System Ronan O’Grady BBLS (European), AITI)

2 The Practice Is located on the 4th Floor, 8-34, Percy Place, Dublin 4. The mission of the practice is to provide legal and practical solutions to our clients’ problems.

3 The Practice

4 Our firm has a strong commercial emphasis and is dedicated to providing clients with a fast efficient and reliable service constantly adapting to meet with diverse requirements in a rapidly changing and increasingly complex environment. The Practice

5 Our focus is aimed towards the solution of client needs in the most practical and constructive manner possible. The Practice

6 VAT – Basic Principles 1. The Common System of VAT 2. The Objectives of the New System 3. Taxable and Accountable Persons 4. Connected Person 5. Freehold / Freehold Equivalent Interest 6. Deductibility Adjustment 7. Development 8. Adjustment Period 9. Completed and Occupied 10. Escaping the VAT Net 11.Taxable Sales of Property 12.Leases and VAT – Overview 13. Capital Goods

7 VAT – The Basics  Applies on the supply of taxable goods and services  No sticking VAT for fully accountable persons – (they can reclaim it)  VAT is absorbed by businesses (banks, insurance companies etc.) engaged in exempt activities and private individuals

8 The Common System of VAT Along with other EU Member States, we are obliged to apply the “Common System of VAT” – but prior to 1 st July, 2008:  We taxed certain occupational leases as a supply of goods - for all other EU States, leasing is a taxable service.  We did not allow time apportionment of VAT according to taxable usage for capital assets – a capital goods system

9 Example In June 2006, a bank buys a new property for €20m plus VAT of €2.7m. In April 2008, it sells it for €23m. The bank will get no credit for the VAT incurred in In other EU Member States the Bank could claim a refund of the 2006 VAT reduced on a time apportioned basis. How? On a ten year VAT Life from date of purchase it might get 8/10 back based on a remaining 8 years of that 10 year VAT Life and on a 20 year VAT Life it could reclaim 18/20 or 9/20

10 The Objectives of the New System  To regularise VAT on the leasing of property  To provide a capital goods system for property in the VAT Net  To move our system closer to the common system of VAT

11 New concepts for the New System  The new system is based on an array of new concepts. Some are relatively simple, others are very strange in an Irish context.  Some are defined, others must be labelled so they can be identified.

12 Taxable Person / Accountable Person From the 1 st of July, 2008;  A “Taxable Person” is a person engaged in economic activity (including exempt activities for VAT purposes)  An “Accountable Person” is a person who is obliged to register and account for VAT  Many vendors and purchasers of property and landlords may find that they are obliged or encouraged to register for VAT  Solicitors/Accountants must be able to advise them accordingly

13 Connected Person Very widely defined linkage for anti avoidance including relations, partners, common controlled companies, trustees, settlors, beneficiaries are used in determining whether a sale of developed property is mandatorily taxable and to deny a landlord the right to charge VAT on an occupational lease in certain circumstances.

14 Freehold / Freehold Equivalent Interest Freehold – Self Evident A Freehold Equivalent Interest - is a lease which bestows effective economic ownership of a property (an ownership lease).  Contrast this with an occupational lease which is a lease of property under which the rent is merely a payment for the use of the property let. Why is the distinction significant?  Because the consideration of the grant of a lease which is a Freehold Equivalent Interest may be taxed as the supply of immovable property (13.5%) and the consideration for the grant of an occupational lease may be taxed as a service (21%)

15 “Completed” and ”Occupied”  “Completed” means the development of the property has reached such a state, apart from any finishing or fitting out works, that the property can be used for the purposes it was designed and the utilities and services required are connected.  “Occupied” means occupied and fully in use following completion and where the property is let, occupied and fully in use by such tenant  The dates these occur are part of the VAT history of a developed property.

16 Deductibility Adjustment A Deductibility Adjustment is a recalculation of the VAT liability of a property owner triggered by an event, such as an exempt sale or a letting where the option to tax is not exercised or change of taxable use. Final deductibility adjustment applies on a time apportioned basis over the VAT life or the property. An interval deductibility adjustments can apply in respect of that interval only. A deductibility adjustment can be in favour of the Revenue or of the tax payer.

17 VAT, Property and Development As a general rule, the supply of a property is not taxable unless it has been developed or acquired in a developed condition. A property is developed for VAT purposes if it has undergone:  Construction works on a building (generally 4 walls and a roof); or  Operations to effect material change of use. Under the new system “Refurbishment“ is defined as “development to a previously completed Building”.

18 Examples of Undeveloped Property  The sale of a Greenfield site (unless services are laid to it or it is sold in conjunction with a development agreement); or  An old building, such as a Georgian building, which has not been the subject of construction work or engineering or other operations to effect a material change of use.

19 Adjustment Period The period of 20 intervals (20 years approximately) since the date a property was developed; or,  If acquired after development, subject to a right to claim VAT on the acquisition, the period of 20 intervals (20 years approximately) from that acquisition  If refurbished (and held by the refurbisher), the period of 10 intervals (10 years approximately) from the refurbishment.

20 Examples of Developed Property The sale of a newly completed office block. The sale of an old building which has been subjected to works to effect a materially changed use such as where an old warehouse has been converted to shop units. But a developed property does not stay taxable forever.

21 Development – Period 1  The old cut off date of 31 st of October, 1972 is gone  This liberates quite a number of properties which were regarded as being in the VAT net on 30 th of June,  Cut off or the adjustment period is decided on the basis of new rules

22 Taxable Supplies of Property (1) After the 30 th of June, 2008, only the following are mandatorily taxable at 13.5%:  New Residential property sold by a developer after the 30 th of June,  New Commercial property sold by a developer after the 30 th of June, 2008 and within five years of development

23 Taxable Supplies of Property (2)  Commercial property sold by the owner within five years of development at any time until the property:  Has been occupied for at least two years; and  Since development has been the subject of at least one arms length sale. (sales between commercial persons are ignored) These types of property are called New or Nearly New These types of property are called New or Nearly New

24 Example In July, 2008, a factory is completed. It is sold on the 1 st of August, The sale is mandatorily taxable at the 13.5% rate. On the basis that from the 1 st of August, 2008 it is occupied on a continuous basis, any further sales until the 30 th of June, 2010 will also be mandatorily taxable.

25 What Happens Then? What do we call property which is not new or nearly new but still can have between 15 and 18 interests on years in its adjustment period? The best title for it is the “UNNEW”

26 Example On the 1 st of July, 2008, an office is completed. It is sold to an accountable person on the 1 st of August, 2008 and occupied until the 1 st of January, 2011 (2½ years after completion). It is no longer new or nearly new but rather “unnew”. For what special treatment is an “unnew” property singled out?

27 Exempt with Option to Tax (1) This bland but misleading named concept can give trouble  We christen it.

28 Exempt with Option to Tax (2) EWOTT!

29 Exempt with Option to Tax (3) If you do not exercise the option to tax on the sale of “unnew” property you may suffer a Deductible Adjustment. VAT claimed on acquisition or development reduced on a time apportioned basis will be clawed back by way of deductibility adjustment.

30 Example (1) In 1997, a property was developed at a cost of €10m PLUS vat of €1.35M. The VAT is reclaimed and the property is used continuously for fully taxable purposes. If it is sold in July 2008 (after 11 intervals) and the option to tax is not exercised, the seller will have a debit deductibility adjustment of €0.65m. Effectively the seller is penalised under the capital goods system for VAT attributable to the residue of the adjustment period.

31 Example (2) But there is a solution! Exercise the joint option to tax the sale. If the option is validly exercised the purchaser self accounts for VAT and the vendor is of the hook. Be sure it is exercisable - Both vendor and purchaser must be taxable persons. - Purchaser must register and account for VAT

32 Out of Scope After unnew (that is after the Adjustment Period has expired) a property is out of scope (old). Any sale is free of VAT.

33 Out of Scope – Diagram of Adjustment Period The Life of a Developed Property 20 years approximately —————————► The Life of a Refurbished Property 10 years approximately —————————► New Nearly New “Unnew” Out of Scope New Nearly New “Unnew” Out of Scope

34 Leasing and Letting  The old Capitalised value system for taxing leases is gone.  The letting of a property under an occupational lease is an exempt service for VAT purposes and is also subject to a landlord’s option to tax at 21%.

35 Leasing and Letting Example: Lease of new unit in shopping centre granted on the 30 th of June, VAT is charged on capitalised value. Contrast this with a lease of a new unit in a shopping centre granted on the 1 st of July, If LL opts to tax, VAT is charged at 21% on rent. If LL does not opt to tax, LL must repay VAT on input costs on acquisition or development of the unit.

36 Assignment / Surrender of Occupational Lease  This is one of the features which solicitors/Advisors will find bizarre.  Is it a supply of immovable goods or the supply of a service?  Answer – generally it is the supply of a service, the tax rate can be 21% of the Consideration payable. By way of exception, Assignments and Surrenders of certain Leases still in the VAT net on the 1 st of July, 2008 known as “Legacy Leases” are taxed as the supply of immovable goods in accordance with a formula.

37 Conditions of Sale under the New Regime – Acting for a Vendor  Generally, vendors and their advisors are cautious people.  They feel that it is safer to charge VAT even if there may be a chance that it does not apply  This may be unsafe and is unlikely to satisfy a diligent purchaser.

38 Conditions of Sale under the New Regime – Acting for a Vendor  Have presentable VAT records when drafting the contract.  You must identify the VAT status of property  Remember the supply of a freehold equivalent lease is a sale of immovable goods.  The sale of an occupational lease can be taxable at 21% on the premium.  Is your client a taxable person?  Is your client an accountable person?  Does your client have partial deductibility?  Is the purchaser a taxable person? If not, the option to tax the sale of unnew freehold/freehold equivalent is not available.

39 Conditions of Sale under the New Regime – Acting for a Purchaser  Make sure you review the VAT records and satisfy yourself that the VAT treatment is appropriate.  Identify the VAT status of the property.  Is your client a taxable person?  Is your client an accountable person?  Does your client have partial deductibility?  Will the property be used by the purchaser for wholly taxable activities?  Does the VAT burden actually fall on your client?  Could the VAT conditions be changed to suit your client?  Register for VAT if option to tax exercised.

40 Occupational Lease Terms – Acting for a Landlord Consider:  Exercise Landlord’s option to tax and oblige tenant to pay VAT on rent  Right to cancel and opt to charge VAT on rent  Prohibition for VAT on assignment to connected person.  Indemnity against VAT triggered by unwitting use of property by connected person where the VAT deductibility ratio is less than 90%  Prohibition on use with less than 90% VAT recoverability by connected person.  No responsibility taken (unless agreed) for tenant’s VAT on refurbishments.  Register for VAT

41 Occupational Lease Terms – Acting for a Tenant  VAT invoices to be issued for each payment of VAT on rent.  Date adjustment period ends to be advised.  If refurbishment is to take place, look for Landlord to take responsibility for VAT on surrender.

42 Reward for the Vigilant Tenant Landlord’s adjustment periods are finite. If a tenant with partial deductibility knows the date of expiration of his Landlord’s adjustment period, he can ask his Landlord to cancel the option to tax the lease on that date. No VAT will then apply on the rent. He may ask for an option to pay the Landlord to cancel when the VAT cost to the Landlord is low. Tax trap for Landlord if property is still new or nearly new.

43 Consider the Use Example: A bank supplies both taxable and exempt services form an old building. Due to expansion of its business, it will acquire a new office block after the 30 th of June, If it moves its exempt services operations to the new office it will suffer irrecoverable VAT on the acquisition, however, if it moves its taxable services to the new office, it stands to recoup VAT on the acquisition of the new office – 13.5% is a very significant saving.

44 Watch for the Tax Traps If a vendor is selling “unnew” property and fails to exercise the option to tax, he will suffer a clawback of VAT on the sale.

45 Plan Ahead Include VAT planning in any strategy for the sale, purchase or leasing of property. If you wait until after a transaction has been agreed, planning for VAT may no longer be an option.

46 Reading Material 1. Revenue VAT on Property Guide 2. Revenue FAQ 3. Tax Briefing No Law Society VAT Special Conditions 5. Key to VAT on Property Transactions (Law Society Gazette October, 2008)

47 In Conclusion Tax Planning  The most revolutionary change in VAT on property since VAT was introduced in  There will be many tax planning opportunities and many tax traps, especially for exempt and partially exempt businesses.  Solicitors/Advisors who ignore VAT do so at their peril.  Slides give a general picture not necessarily comprehensive in a particular situation.

48 Appendix 1- Tables and Checklist

49 Table 1: Sale of Freehold/Freehold Equivalent Interest of Assignment/ Surrender of Legacy Lease where VAT is Mandatorily Chargeable at 13.5% Property Sold Tax Status Vendor Must Purchaser Must VAT Calculated By Reference To deductibility Adjustment For Vendor Relevant VAT Special Conditions Residential property sold by the developer (including property covered by s.4B(7)). Taxable Charge VAT at 13.5% If acting as taxable person, ask for invoice 13.5% of market value / selling price N/A 3.1 and 3.2 Partially developed property. Taxable Give VAT invoice Charge VAT at 13.5% Ask for invoice 13.5% of market value / selling price Possible credit if vendor has partial VAT recovery. 3.1,3.2 and 3.9 New or nearly new freehold / freehold equivalent commercial property (including property covered by s.4B(3)) Taxable Give VAT invoice Charge VAT at 13.5% Ask for: (a) invoice; (b) Date of development; and (c) Evidence of dates and periods of occupation if relevant. 13.5% of market value / selling price Possible credit if vendor has partial VAT recovery. 3.1,3.2 and 3.9 Assignment or surrender during adjustment period by an accountable person of occupational lease created by a taxable person prior to 1/7/08 of commercial property (a legacy lease). TaxableGive: (a) Statement under section 4C(8)(a); And (b) Copy of capital goods record Ask for: (a) Document under Section 4C(8)(a); and (b) Copy of capital goods record; And self account for VAT Apply the formula T X N Y Premium / reverse premium ignored. Possible credit if vendor has partial VAT recovery. 3.1, 3.4 and 3.9 or 3.1 and 3.2 and 3.9

50 Table 2: Exempt Sale during Adjustment Period of Second-hand Freehold / Freehold Equivalent Interest where, unless Option Exercised, deductibility Adjustment may Apply Property Sold Tax Status Vendor Must Purchaser Must VAT Calculated By Reference To deductibility Adjustment For Vendor Relevant VAT Special Conditions Developed second-hand commercial property sold during adjustment period (both vendor and purchaser are taxable persons). Exempt, and if joint option to tax not exercised, deductibility adjustment may apply. Consider: (a) Obliging purchaser to exercise joint option to tax, and (if appropriate) claiming VAT rebate (if any); or (b) Accounting to the revenue for deductibility adjustment. If joint option exercise, apply reverse charge VAT at 13.5% If joint option exercised: 13.5% of market value / selling price. If joint option not exercised: Apply the deductibility adjustment formula; B X N T Debit if option to tax not exercised. Possible credit if vendor has partial VAT recovery and option is exercised. 3.1, 3.3 (first alternative) and 3.9 if joint option is exercised. 3.1 and 3.3 (second alternative) if joint option is not exercised.

51 Table 3: Sale of Transitional Freehold / Freehold Equivalent Interest of Legacy Lease by a Taxable Person with no Entitlement to Deduct VAT Property Sold Tax Status Vendor Must Purchaser Must VAT Calculated By Reference To deductibility Adjustment For Vendor Relevant VAT Special Conditions Commercial property acquired or developed prior to 1/7/08 and sold during adjustment period. Exempt with joint option to tax (with no deductibility adjustment). Consider: (a) Obliging purchaser to exercise joint option to tax to secure partial refund of VAT under Section 12 E(7)(a); or (b) treat supply as exempt. If joint option exercised apply reverse charge VAT at 13.5% If option exercised, 13.5% of market value / selling price. Possible credit if option exercised. If VAT is charged, 3.1, 3.2, 3.3 (first alternative) and 3.9 or if no VAT is charged delete VAT clause entirely. Assignment during adjustment period of occupational lease created by a taxable person prior to 1/7/08 of commercial property (a legacy lease). Exempt with joint option to tax (with no deductibility adjustment). Consider: (a) Obliging purchaser to exercise joint option to tax to secure partial refund of VAT under Section 12 E(7)(a); or (b) treat supply as exempt. If joint option exercised. (a) Ask for VAT statement; (b) Ask for copy of capital goods record; and (c) Apply reverse charge according to formula. T X N T X N Y Apply formula in Table 1D. Premium / reverse premium ignored for assignment or surrender of a legacy lease. Possible credit if option exercised. 3.1, 3.3 (first or second alternative) and 3.9

52 Table 4: Exempt Sale of Freehold / Freehold Equivalent Property where no deductibility Adjustment Applies Property Sold Tax Status Vendor Must Purchaser Must VAT Calculated By Reference To deductibility Adjustment For Vendor Relevant VAT Special Conditions Freehold / freehold equivalent property which was never developed or is out of the adjustment period. Exempt with option to tax. Confirm tax status of property to purchaser Ask for tax status to be confirmed by documentary evidence. N/A unless option to tax is exercised, then 13.5% N/A None necessary if joint option is not exercised. If joint option to tax is exercised as Table 1, item D Second-hand residential property (not developed since acquisition) in private residential use by owner. Not taxable. N/AN/AN/AN/A None necessary.

53 Table 5: Assignment or Surrender for Premium / Reverse Premium of Occupational Lease (other than Legacy Lease) by Taxable Person: VAT is chargeable at 21% on Premium / Reverse Premium Property Sold Tax Status Vendor Must Purchaser Must VAT calculated By Reference To Relevant VAT Special Conditions Assignment or surrender for premium/reverse premium by taxable person of occupational lease created after 30/6/08 not covered in Table 6 item B. Premium / reverse premium taxable as service. If payer, ask for invoice. If payee, provide invoice and charge VAT at 21% If payer, ask for invoice. If payee, provide invoice and charge VAT at 21% 21% of premium / reverse premium 3.1, 3.5 or 3.6 and 3.9 Assignment or surrender by taxable person for premium/reverse premium of occupational lease created prior to 1 st July, 2008 for a term or less than 10 years where the Landlord’s waiver of exemption from applies. Premium / reverse premium taxable as service. If payer, ask for invoice. If payee, provide invoice and charge VAT at 21% If payer, ask for invoice. If payee, provide invoice and charge VAT at 21% 21% of premium / reverse premium Not covered. Use 3.1, 3.5 adapted and 3.9

54 Table 6: Assignment / Surrenders of Lease where no VAT is Chargeable as either a Supply of a Good or a Service Property Sold Tax Status Vendor Must Purchaser Must VAT Calculated By Reference To deductibility Adjustment For Vendor Relevant VAT Special Conditions Assignment or surrender by taxable person for premium/reverse premium of: (a) Occupational lease for a term of 10 years or more created prior to 1/7/08, where VAT was not chargeable on supply of Lease (b) Occupational lease for a term of less than 10 years created prior to 1/7/08 where Landlord did not waive exemption from VAT on rent. Exempt (by Revenue concession). N/AN/AN/AN/A None necessary Surrender for premium / reverse premium of occupational lease created after 30/6/08 where landlord has not exercised the landlord’s option to tax. NoneNoneNoneNoneNoneNone

55 Table 7: Transfer of Business under Section 3(5)(b)(iii) and Section 5(8) Property Sold Tax Status Vendor Must Purchaser Must VAT Calculated By Reference To deductibility Adjustment For Vendor Relevant VAT Special Conditions Partially developed freehold / freehold equivalent commercial property. Not taxable because not a supply for VAT purposes. Claim for deductibility adjustment (if any) Account for any deductibility adjustment on acquisition For purchaser’s CGS: VAT that would have been charged had the transaction been a supply for VAT purposes Possible credit if vendor has partial VAT recovery. 3.1, 3.8 and 3.9 New or nearly new freehold / freehold equivalent interest. Not taxable because not a supply for VAT purposes Claim for deductibility adjustment (if any). (a) Set up capital goods records based on 20 intervals. (b) Account for any deductibility adjustment on acquisition. For purchaser’s CGS: VAT that would have been charged had the transaction been a supply for VAT purposes. Possible credit if vendor has partial VAT recovery. 3.1, 3.8 and 3.9

56 Property Sold Tax Status Vendor Must Purchaser Must VAT Calculated By Reference To Deductibility Adjustment For Vendor Relevant VAT Special Conditions Second-hand freehold / freehold equivalent Not taxable because not a supply for VAT purposes. Give copy of capital goods record. (a) Maintain capital goods record based on continuation of business. (b) Account for any deductibility adjustment at end of vendor’s current interval. For purchaser’s CGS: vendor’s VAT position. N/A 3.1, 3.8 and 3.9 Assignment / surrender of legacy lease Not taxable because not a supply for VAT purposes. Give capital goods record. (a) Maintain capital goods record based on continuation of business. (b) Account for any deductibility adjustment at end of vendor’s current interval. For purchaser’s CGS: vendor’s VAT position. N/A 3.1, 3.8 and 3.9 Assignment / surrender of occupational lease (other than legacy lease) for premium / reverse premium. Not taxable because not a supply for VAT purposes – The Revenue accept as intangible asset for Section 5(8) N/AN/A Premium / reverse premium N/A 3.1, 3.8 and 3.9 and insert new special condition as appropriate.

57 Summary in Diagram Form Are you selling an old property? Completed>5 years prior to sale, and not developed in those 5 years Preliminary tasks 1. Is it a sale for VAT purposes? 2. Do the new rules apply? Are you selling undeveloped land? Land that has had no work done to it and is not caught by anti-avoidance The sale is exempt from VAT The sale is exempt from VAT Are you selling an old building? Completed>5 years prior to sale, and no significant development in those 5 years. The sale is exempt from VAT Are you selling a used second-hand property? Completed / not developed since completion / occupied for 24 months / previous VATable transfer since completion between unconnected VATable persons The sale is exempt from VAT

58 Are you selling a used second-hand building? Completed within 5 years / occupied for 24 months / previous VATable transfer since completion between unconnected VATable persons / no significant development since completion The sale is exempt from VAT The sale is VATable

59 Compare and Contrast the Five Exempt Categories Exempt Category 1 Sale of undeveloped land Provided the sale is not snared by the anti-avoidance legislation Exempt Category 2 Sale of old property Completed > 5 years ago Not been developed in last 5 years Exempt Category 4 Sale of used second-hand property Completed within 5 years of sale not developed since most recent completion occupied for 24 months since most recent completion the previous sale was between VATable persons Exempt Category 3 Sale of old building Completed > 5 years ago developed in last 5 years but not significantly Exempt Category 5 Sale of used second-hand Building Completed within 5 years of sale development since that completion not significant occupied for 24 months since that Completion already a previous sale since that completion The previous sale was between VATable persons the previous buyer and seller were not connected

60 Notes 1.The distinction between a “property” and a “building” in this context is that a “property”, as well as including buildings, covers other property works, such as bridges, roads, golf-courses, dams and so on. A “building” means just that: “a building”. 2.If you contrast the meanings of “old properties” and ”old buildings” (categories 3 and 4), you will note that, in order for it to be an old property, no development work must have taken place in the five years prior to sale. In contrast, in the case of “an old building”, no significant development work must have taken place. 3.“Old” in the context of “old properties” and “old buildings” means more than five years: to paraphrase Mr. Wordsworth, five years must have passed; five summers, with the length of five long winters! 4.You will note that in all categories, except category 1, completion must have taken place.


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